Sudden stops,sectoral reallocations,and the real exchange rate

A sudden stop of capital flows into a developing country tends to be followed by a rapid switch from trade deficits to surpluses, a depreciation of the real exchange rate, and decreases in output and total factor productivity. Substantial reallocation takes place from the nontraded sector to the traded sector. We construct a multisector growth model, calibrate it to the Mexican economy, and use it to analyze Mexico's 1994–95 crisis. When subjected to a sudden stop, the model accounts for the trade balance reversal and the real exchange rate depreciation, but it cannot account for the decreases in GDP and TFP. Extending the model to include labor frictions and variable capital utilization, we still find that it cannot quantitatively account for the dynamics of output and productivity without losing the ability to account for the movements of other variables.     

Nominal and real convergence between the CEE countries and the EU: a fractional cointegration analysis

This paper examines the real and nominal convergence between the Central and Eastern European countries and the EU, using fractional cointegration analysis for the period 1980–2003. Fractional cointegration analysis is a flexible methodology, which allows for more subtle forms of mean reversion. The tests performed are those of Geweke and Porter-Hudak. The convergence processes are valid when macroeconomic time series used in the study are fractionally cointegrated. The results indicate that inflation and interest rates series of six sample countries are fractionally cointegrated with those of the EU. Therefore, nominal convergence has been achieved by some of the transition countries, but the equilibrium errors display long memory. Results also indicate that industrial outputs of most countries in the sample are not fractionally cointegrated with that of the EU. The results further indicate that both nominal and real convergence have been achieved only for Hungary.     

Exchange rate regimes and inflation: only hard pegs make a difference

Abstract.  Using data from a large sample of developing countries from 1985 to 2001, we confirm that hard pegs (currency boards or a shared currency) reduce inflation and money growth. There is no evidence that soft pegs confer any monetary discipline, after other factors are controlled for. Inflation triggers regime switches. Under hard pegs, monetary growth is unaffected by fiscal deficits or by inflation shocks. Under soft pegs, as under floats, increased fiscal deficits and positive inflation shocks are associated with higher monetary growth. The apparently slower per capita output growth under hard pegs is explained by their geographical distribution. JEL classification: F41     

The effects of exchange rate regimes on real exchange rate misalignment

The literature on exchange rate regimes has paid little attention to the effects of exchange rate policies on real exchange rate misalignments. This paper contributes to filling that gap by exploring such relation empirically. Because the underlying model is probably not linear and the treated individuals differ from non-treated individuals, we rely on Matching models rather than on standard regressions. Our main finding is that pegs are associated with more overvaluation. The results are robust to different exchange rate regime classifications, misalignment indexes, and matching estimators. The evidence presented suggests that policy-makers concerned with overvaluation should avoid sticking with rigid arrangements for too long.     

A fundamental inequality to compare dynamic effects of real and asset sector disturbances in a three-country model of the world under alternative exchange rate regimes

Dynamic effects of financial and real disturbances are compared using intertemporal optimization criteria in a world with one key and two non-key countries. A resulting inequality is used to establish conditions for an exchange rate union to exist between the two non-key countries.     

Exchange rate volatility and exports: a firm-level analysis

The relationship between real exports and exchange rate volatility is investigated using panel data analysis at the firm level. Results indicate that there is no negative or positive relationship between volatility and real exports. In addition, firm size and level of international activity do not influence the size and significance of the volatility effect on exports. However, there is some evidence that firms use import revenue to lower their exchange rate exposure.     

Exchange rate regime,real misalignment and currency crises

Based on 69 sample countries, this paper examines the effect of macroeconomic fundamentals on real effective exchange rates (REER) in these sample countries. Using the misalignment of actual REER from its equilibrium level, we have estimated the factors explaining the extent of currency over- or under-valuation. Overall, we find that the higher the flexibility of the currency regime, the lower is the misalignment. The estimates are robust to different sub-samples of countries. We then explore the impact of such misalignment on the probability of a currency crisis in the next period, indicating the extent to which misalignment could be used as a leading indicator of a potential crisis. This paper thus makes a new contribution to the debate on the choice of exchange rate regime by bringing together real exchange rate misalignment and currency crisis literature.     

Exchange rate bands of inaction and play-hysteresis in Greek exports to the Euro Area,the US and Turkey: sectoral evidence

In this paper a non-linear model is applied, where suddenly strong spurts of exports occur when changes of the exchange rate go beyond a zone of inaction, which we call “play” area—analogous to mechanical play. We implement an algorithm describing path-dependent play-hysteresis into a regression framework. The hysteretic impact of real exchange rates on Greek exports is estimated based on the period from 1995Q1 to 2014Q4. Looking at some of the main export partners of Greece, the euro area, Turkey and the US, and some of its most important tradeable sectors we identify significant hysteretic effects for a part of the Greek exports. We find that Greek export activity is characterized by “bands of inaction” with respect to changes in the real exchange rate and calculate the further real depreciation needed to trigger a spurt in Greek exports. To check for robustness we (a) estimate Greek export equations for a limited sample excluding the recent financial crisis, (b) use export weight instead of deflated nominal exports as the dependent variable, (c) employ a political uncertainty variable as a determinant of the width of the area of weak reaction. Overall, we find that those specifications which take uncertainty into account display the best goodness of fit. In other words: the option value of waiting dominates the real exchange rate effect on Greek exports.     

Exchange Rate Movements and Employment Growth: An OCA Assessment of the CEE Economies

According to the traditional optimum currency area approach, not much will be lost from a very hard peg to a currency union if there has been little reason for variations in the exchange rate in the past. This paper takes a different approach and highlights the fact that high exchange rate volatility may also signal high costs for labor markets. The impact of exchange rate volatility on labor markets in the CEECs is analyzed, revealing that volatility vis-à-vis the euro significantly lowers employment growth. Hence, eliminating exchange rate volatility could be considered a substitute for removing employment protection legislation.     

Trade liberalisation in fixed and flexible exchange rate regimes: a CGE analysis for Nepal

This paper uses a computable general equilibrium model applied to social accounting matrix database to assess the macroeconomic and distributional impacts of trade with and without exchange rate (EXR) liberalisation in a small, developing and transition economy of Nepal. We implement trade liberalisation simulations under two scenarios: fixed EXR but endogenous foreign savings and flexible EXR but exogenous foreign savings. The second scenario is again subdivided into two parts – higher foreign savings as per the inference of the first scenario, and the constant foreign savings. We conclude that the economy undergoes contraction if import, export and exchange rate liberalisations are all implemented simultaneously. However, if currency appreciation and higher foreign saving inflow are controlled, the overall growth impact is still positive, but additional policy measures are necessary to make the impacts pro-poor.     

Exchange rate volatility and international trade: A general-equilibrium analysis

We analyze the relation between exchange-rate volatility and the volume of international trade, in a general-equilibrium stochastic-endowment economy with imperfect international commodity markets, and treating both variables as endogenous. Even in the simplest model, the sign of the relation depends on the source for the change in volatility. For instance, more volatility of the endowments and higher costs to international trade both boost exchange risk (and lower welfare); but the first increases the expected volume of trade, while the second decreases trade. Note that even the (inter-equilibria) relation between trade and welfare is ambiguous.     

Exchange rate policy and trade balance: a cointegration analysis of the Argentine experience since 1962

Using multivariate cointegration tests for nonstationary data and vector error correction models, this article examines the determinants of trade balance (TB) for Argentina over the last forty to fifty years taking into account that the short-run impacts of currency depreciation on the TB behaviour may differ from the long-run effects. Our investigation confirms the existence of long-run relationships among TB, real exchange rate (RER) and foreign and domestic incomes for Argentina during different RER management policies. Based on the estimations, the Marshall-Lerner condition is checked and, by means of impulse response functions, we trace the effect of a one-time shock to the RER on the TB not finding support for a J-curve pattern in the short-run.     

Exchange rate and price level dynamics under perfect substitutability of real and financial assets

This note investigates the implications of arbitrage between domestic financial and real assets for the evolution through time of the exchange rate and the price level after a monetary schock. The model yields results contrasting sharply with those of the traditional model of exchange rate dynamics based on international arbitrage [e.g. Dornbusch (1976)]. In particular, there is no overshooting of the exchange rate and the short-run deviations from purchasing power parity are the opposite of those implied by the traditional model.     

Short-run relations between the real sector and inflation

Zusammenfassung Die österreichische Hartwährungspolitik strebt Geldwertstabilisierung mit dem Zwischenziel einer niedrigen und wenig schwankenden inflationsrate an. Da gleichzeitig das wirtschaftspolitische Endziel der Beschäftigungssicherung verfolgt wird, könnte ein negativer Phillipskurven-Zusammenhang (zwischen Inflationsrate und Arbeitslosenquote) auf einen Zielkonflikt hinweisen. Die Arbeit kommt zu dem Schluß, daß mit der Hartwährungspolitik das genannte Zwischenziel erreicht wurde, daß aber in der kurzen Frist ein negativer Einfluß auf Wirtschaftswachstum und Beschäftigung empirisch nicht nachweisbar ist. Die Untersuchung wird anhand inverser Phillipskurven geführt, in denen eine Variable des realen Sektors als Funktion der Inflationsrate (und diese wiederum in Abhängigkeit von der Währungspolitik) dargestellt ist. Kausalitätstests lassen es gerechtfertigt erscheinen, den kurzfristigen Zusammenhang zwischen realen Variablen und der Inflationsrate in der inversen Form der Phillipskurve auszudrücken.

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List of variables in empirical regressions ALQ unemployment rate, in percent of dependent labour force - AOS unemployed persons minus vacanies, in percent of dependent labour force - AQS seasonally adjustedALQ - BESL logarithm of the number of dependent employees - BL logarithm of real gross domestic product - D73 dummy variable for introduction of value-added tax in 1973 - D84 dummy variable for tax changes at the beginning of 1984 - EP anticipated inflation, as derived from equation (13) - IPL logarithm of industrial production index - PDL logarithm of German consumer price index - PL logarithm of Austrian consumer price index - PML logarithm of Austrian import unit values - RP unanticipated inflation, as derived from equation (13) - S1, S2, S3 seasonal dummies - VALQ deviations from deterministic trend ofALQ - VAQS deviations from deterministic trend ofAQS - VBESL deviations from deterministic trend ofBESL - VBL deviations from deterministic trend ofBL - VIPL deviations from deterministic trend ofIPL - V1, V2, V3, V4 variables of inflation uncertainty (see Note 6) - XRL logarithm of Austrian merchandise exports, in volume terms I gratefully acknowledge valuable comments on a preliminary version of this paper by F. X. Hof and G. Tichy. I am fully responsible, however, for remaining flaws.     

Evidence on the sectoral monetary transmission process under a fixed exchange rate regime

Traditional macroeconomic models suggest that monetary policy changes are largely ineffective in fixed exchange rate economies. However, Edwards and Végh (1997) present a model that shows this might not be the case, as a tightening in monetary policy raises financial costs faced by firms and therefore lowers real wages and, by extension, consumption. This paper empirically tests this hypothesis using data on a country with one of the longest running fixed exchange rate regimes (1975–present). The results of the study confirm the theoretical predictions of Edwards and Végh, but they also show that the propagation of nominal shocks in fixed exchange rate systems is comparatively slower than in countries with a more flexible exchange rate regime.     

Inflation and real sectoral output shares: Dynamic panel model evidence from seven OECD countries

Models of the cost of inflation often conclude that inflation misallocates resources. For example, inflation may lead to an increase in the variability of relative prices and it is often claimed that this increase in variability leads to a misallocation of resources. This claim raises the following empirical question, does inflation alter the composition of real output; that is, does it change real output shares? We examine this question using dynamic panel data methods for nine sector panels each with seven OECD countries from 1970 to 2005. We find evidence that inflation changes the real shares of some sectors even when inflation is treated as endogenous.     

Exchange rate and wage-price dynamics: A theoretical analysis and an econometric investigation

This paper is an attempt to analyze inflation dynamics in a small open economy as the result of the interaction between wage and price determination behaviors and the interest rate-exchange rate feedback in the context of Dornbusch's model. An extended version of this model is specified and analyzed formally. Then the model is estimated for five OECD countries using a full information maximum likelihood technique. Finally, simulations of the effect of monetary shocks are presented for four countries.     

Fertility and the real exchange rate

Abstract .  We use a quinquennial data set covering 87 countries between 1975 and 2005 to investigate empirically the relationship between fertility and the real effective exchange rate. Theoretically, a country experiencing a decline in its fertility rate can be expected to experience a real depreciation. We test and confirm this hypothesis, controlling for a number of other potential determinants. We find a statistically significant and robust link between fertility and the exchange rate. Our point-estimate is that a decline in the fertility rate of one child per woman is associated with a depreciation of approximately 15% in the real effective exchange rate.     

Deforestation and the real exchange rate

Deforestation is a phenomenon that has largely been concentrated in the developing world. We construct a theoretical model of deforestation that focuses on the factors affecting the incentives to transform forested land into agricultural land. We show that: (i) lower discount rates and stronger institutions decrease deforestation; (ii) a depreciation in the real exchange rate increases deforestation in developing countries whereas the opposite obtains in developed countries; (iii) paradoxically, better institutions may exacerbate the deleterious impact of a depreciation in developing countries. These hypotheses are tested on an annual sample of 101 countries over the 1961–1988 period, and are not rejected by the data. Our results suggest that short-term macroeconomic policy, institutional factors, and the interaction between the two, are potentially important determinants of environmental outcomes.